Wolfspeed, Inc. (WOLF) Q3 2024 Earnings Call Transcript

Hello everyone and welcome to Wolfspeed's Third Quarter Fiscal 2024 Conference Call. My name is Lydia and I will be your operator today. I will now pass you over to Tyler Gronbach, Vice President of External Affairs, to begin. Please proceed.

Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed's third quarter fiscal 2024 conference call. Today, Wolfspeed's CEO, Gregg Lowe; and Wolfspeed's CFO, Neill Reynolds, will report on the results for the third quarter of fiscal year 2024. Please note that we will be presenting non-GAAP financial results during today's call, which we believe provides useful information to our investors. Non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered a supplement to and not a substitute for financial statements prepared in accordance with GAAP. A reconciliation to the most directly comparable GAAP measures is in our press release and posted in the Investor Relations section of our website, along with a historical summary of other key metrics. Today's discussion includes forward-looking statements about our business outlook and we may make other forward-looking statements during the call. Such forward-looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mentioned important factors that could cause actual results to differ materially. Last note that all discussions today will be on a continuing operation basis. During the Q&A session, we would ask that you limit yourself to one question so that we can accommodate as many questions as possible during today's call. If you have any additional questions, please feel free to contact us after the call. And now I'd like to turn the call over to Gregg.

Thanks, Tyler, and good afternoon, everyone. Wolfspeed is the world's only pure play vertically integrated silicon carbide company. 100% of our team's focus is to capitalize on the industry transition from traditional silicon to next-generation silicon carbide, helping customers deliver energy-efficient products to market and pursuing outsized returns for our investors. We have an unmatched manufacturing ecosystem, with first-of-a-kind tools and automation that will allow us to scale our efforts as the electrification of key industry segments gains velocity. With that as a backdrop, I'd like to spend a few minutes covering four points. First, we believe the market is not fairly valuing the company consistent with the technology and the business we have built or the strategic potential of the business. The management team and the Board of Directors are focused on this disconnect and routinely consider alternatives to enhance value for shareholders. Second, driving better financial performance and value for shareholders by delivering on our near-term operational commitments for fiscal 2024 and 2025 is at the core of every decision we make. We are laser-focused on increasing the utilization at Mohawk Valley, and as I'll talk about in a few minutes, we are making solid progress there. We are also focused on bringing The JP online, where we are likewise making solid progress on that project. Third, our operational roadmap provides sufficient time to focus all of our efforts on making sure Mohawk Valley and The JP are on track before we move on to new projects, which is not only good for investors but for our customers who are also counting on us to meet our commitments. At this time, there are no additional greenfield projects scheduled to launch until we demonstrate further progress on our existing project and we expect to significantly reduce CapEx for fiscal 2025 ahead of receiving any grants or funding from the US government. Finally, we are deliberately and effectively allocating capital. And let me be clear, our current operational performance and development roadmap does not currently contemplate raising dilutive capital that would lock us into a disadvantageous capital structure at this time, especially considering the disconnect between our current valuation and the leadership position we have built in the silicon carbide market. As stated previously, we are working closely with the Commerce Department and other government entities to secure CHIPS Act and related funding to support our US-based projects. Having laid out those points, let's move on to the specifics of Wolfspeed's performance over the past quarter, which we believe demonstrates the positive results of our operational focus and discipline despite the near-term headwinds in industrial and energy demand. We made strong progress at Mohawk Valley in the third quarter, more than doubling our revenue and delivering $28 million of product to customers from this fab. We are on track to achieve 20% wafer start utilization in Mohawk Valley by June of this year. And to give you a sense of the progress we're making, as of April, we are already at more than 16% utilization based on wafer starts per week, making us extremely confident in our ability to achieve our target in June of 2024. We've made great progress on optimizing factory tool integration and the operating flow is continuing to improve. Our die costs out of Mohawk Valley are better than the equivalent dies being produced in Durham, which is another sign of the progress we've made in the past year. I'm proud of our team for its strong focus on the Mohawk Valley ramp and its ability to hit each of the milestones we put in place a year ago. From a materials perspective, we are the largest producer of silicon carbide substrates in the world, driven by our Durham facility, which is consistently producing high quality and high yielding 200 millimeter wafers out of Building 10. We are continuing to build inventory to support the ramp and the fab in New York, We already are at a high yield for automotive grade MOSFET substrates on our 200 millimeter silicon carbide wafers and are now confident that our Building 10 factory will be able to support at least 25% wafer starts in Mohawk Valley. Our leadership position in 200 millimeter materials will continue to expand with the construction of The JP, a game-changing facility that will significantly grow our materials capacity and support Mohawk Valley's annual $2 billion plus revenue target. Recently, we had the honor of hosting state and local officials, community partners, and employees at a ceremony to celebrate the topping out of the construction at The JP. In attendance that day was US Senator Thom Tillis, another ardent supporter and vocal advocate for Wolfspeed. We have enjoyed significant support for our silicon carbide expansion from all levels of government since we announced our expansion plans in New York and in North Carolina, with visits from President Biden, Senator Schumer, Commerce Secretary Raimondo, Governor Cooper, and Governor Hochul in the last two years. We appreciate their continued partnership and support as we build the world's largest silicon carbide ecosystem here in the United States. The JP will be instrumental in supplying high-quality 200 millimeter silicon carbide materials to our Mohawk Valley fab. During the quarter, we started installing crystal growth furnaces and connected the facility to the power grid, two major accomplishments made possible by the diligence of our global expansion team and our general contractor, Whiting-Turner. Our teams have struck great partnership by applying the many lessons we learned from the ramp of our Durham materials facility in Building 10. Looking ahead, we expect to begin powering up initial furnaces by the end of June, which will allow us to start qualifying furnaces in the September quarter, leading to initial boule production by the end of this calendar year. Construction has progressed incredibly well and we are confident in our ability to meet these targets. As we mentioned last quarter, we continue to be a key supplier of silicon carbide substrates to the broader market, as evidenced by the two supply extensions that we announced in January. Our LTA underscores the importance of our role as the leading provider of high-quality 150 millimeter substrates to the market and we will continue to be an important partner to our customers in the years to come. We believe these agreements are an indicator of where the market for alternative sources of silicon carbide wafers currently stands. On 200 millimeter, we're focused on our internal needs around supplying Mohawk Valley but remain in close contact with our customers to discuss potential 200 millimeter agreements. We've said it before and we'll say it again that silicon carbide is an incredibly complex technology that cannot be rushed or taken lightly. We know this from our 35 plus years of experience and leadership in the industry. Our high quality substrates allow us to produce the highest quality MOSFET devices out of our Mohawk Valley fab where the ramp is progressing well. As I mentioned, Mohawk Valley generated $28 million of revenues this quarter, ahead of the midpoint of our forecast and more than double last quarter's total of $12 million. Neill will give you more specific guidance on Mohawk Valley in a few minutes, but in general, we expect to continue our strong growth trajectory at the facility. As I said earlier, Mohawk Valley is anticipated to achieve 20% utilization this quarter. We also continue to make progress with Mohawk Valley product qualifications in the quarter, completing five more product transfers, including two MOSFET die and three discrete MOSFETs. While Mohawk Valley, which currently services almost entirely EV customers, is humming, the I&E market or industrial and energy market, remains challenged and is weaker than our original expectations, primarily due to inventory buildups across many end market channels predominantly in the Asian markets. We are responding by shifting I&E capacity, both in Durham and Mohawk Valley towards EV. Our ability to shift our production from I&E to EV speaks to the flexibility that our business model provides us. However, this end market shift and change in product mix will have a short-term headwind on gross margins, but it will position us well for fiscal 2025 as we could see the start of a recovery for the I&E demand at some point during this period. Unlike I&E, we continue to see a ramp of EVs that have adopted our silicon carbide devices. While this is a disruptive time in the industry and we continue to see OEMs adjusting and modifying their near-term EV production plans, we remain substantially supply constrained for our silicon carbide devices. As demand remains well above our current supply, we can be nimble and shift much of our supply to other customers to accommodate these near-term changes. Underscoring this continued EV demand is our strong design-in and design-win performance this quarter. As a reminder, a design-in represents business we've been awarded which converts to a design-win once we begin ramping into initial production. This quarter, we achieved approximately $2.8 billion of design-ins, about 80% of which was for EV applications, marking our second highest total on record, totaling over $7 billion of design-ins for fiscal 2024. We're proud to announce that we had approximately $870 million of design-wins in the third quarter. These design-wins typically mature over the next five to seven years, which provides ample revenue visibility for the foreseeable future. Our backlog of design-wins now supports more than 125 car models across more than 30 OEMs over the next three to five years. As we continue to execute on our unprecedented greenfield expansion plans and serve the highest quality silicon carbide materials and devices to a largely untapped market, we maintain our conviction in our strategy. Our strong design-in and design-win trajectories this year, notwithstanding the current gyrations of the EV market, gives us confidence in the future and the longevity of silicon carbide and we look forward to continuing our momentum, particularly at Mohawk Valley through the close of fiscal 2024 and beyond. Now I'd like to pass the call over to Neill to discuss our quarterly guidance.

Thanks, Gregg. Before I go into the detailed financials and following up on Gregg's comments, I would like to frame up our current performance and how it aligns with our longer-term outlook. First, the company's long-term demand remains strong. We achieved another $2.8 billion of design-ins, our second highest quarter ever. Customers who have visited our new state-of-the-art manufacturing facilities and tested and used our products and compared them to rival products continue to choose Wolfspeed as their key supplier across both EV and industrial and energy device applications. In recent months, in materials, key customers such as Infineon in Rome have come back to Wolfspeed for the expansion of multi-year, 150 millimeter wafer supply agreements. In addition, last year, after surveying the materials landscape, Renesas selected Wolfspeed for a 10-year supply agreement, including 200 millimeter substrates that included a $2 billion capacity reservation deposit, which we believe is the largest CRD in the history of semiconductors. Secondly, our operating execution has significantly improved during the last 12 months. One year ago, we delivered a revised ramp schedule for 200 millimeter wafer production out of our Durham campus and Mohawk Valley. Since then, we have achieved every one of those announced milestones, which will culminate in 20% utilization in June 2024. We have also had best-in-class performance from our materials operation, generating revenue at or above our guidance in that timeframe, including $99 million this past quarter, our second highest quarter ever. Let me walk through a few facts related to our 200 millimeter ramp. Die cost from our 200 millimeter substrates at Mohawk Valley, even including the full burden of Mohawk Valley fab underutilization, which was $30.4 million in Q3, is now lower than that of the same product produced out of our Durham fab at 150 millimeter. We expect this cost reduction to accelerate as we continue to ramp the fab. The Mohawk Valley device unit cost performance has been driven by breakthroughs in both yields and cycle times that we are continuing to see improve as we transition into the current quarter. Next, the MOSFET continue to have very strong qualification success in Mohawk Valley. And our back end testing and packaging operation has performed very well with no substantial issues and continues to perform well at higher levels of utilization. Please keep in mind, these results are in a new material substrate in a new fab at a new diameter with tools seeing this technology for the very first time. In addition, this was achieved as we completed the sale of our RF business last year, the third carve-out divestiture in the last five years that has transformed our business and will allow us to remain focused on executing in our capacity ramps in both power devices and materials. Our team is executing very well. Next, we remain sharply focused on optimizing our funding and capital allocation strategy. And with our current financing facilities and finance partners, we expect to maintain a cash position greater than $1 billion for the foreseeable future. From a financing perspective, we have delivered on our plan. In November 2022, we told you we wanted to raise between $4 billion and $5 billion over the next few years. Eight months later, we had executed on $5 billion of low dilution funding from a combination of public markets, private markets, customers, and governments. This allowed us to end the March quarter with over $2.5 billion of cash and liquidity on the balance sheet. Including the final draw of our Renesas customer deposit, we now anticipate ending fiscal 2024 with approximately $2.2 billion to $2.4 billion of cash from liquidity. Looking at CapEx, we expect to spend approximately $2 billion in fiscal 2024, our peak year, consistent with the guidance we communicated last year. This includes $2.2 billion of gross CapEx, offset by approximately $200 million of government incentives in fiscal 2024. In fiscal 2025, we expect a substantial reduction in gross CapEx of about $600 million to $800 million, resulting in approximately $1.4 billion to $1.6 billion of gross CapEx. This CapEx is primarily focused on The JP and Mohawk Valley and does not include any CapEx for a new greenfield facility. We will not begin another greenfield facility expansion until we have achieved our cash flow objectives from our facilities in the US. Government funding meets our minimum requirements, and liquidity and financing plans are clearly in place. The $1.4 billion to $1.6 billion of fiscal 2025 CapEx also does not include potential government incentives, grants, and subsidies that would further lower this CapEx number and potentially be received within fiscal 2025. We continue to work with the CHIPS program office and this remains a key focus. To date, our interactions with the CHIPS office have been very constructive, and we look forward to completing our work with them in the near future. Depending on the timing of when these incentive payments are approved and then funded, it will be very important for the company to maintain flexibility on the financing front. This may include some interim financing under current financing facilities or otherwise that would allow us to enhance our balance sheet and cash position as we proceed with the Siler City construction and add more tools in the Mohawk Valley fab. To be clear, as Greg stated earlier, we do not anticipate that interim financing should we decide to execute it, to be dilutive or lock us into a disadvantageous capital structure. In addition, we expect the initial phase of The JP facility to be largely complete by the end of calendar 2024, closing out the vast majority of our fixed facility spend. At that point, our CapEx will be much more flexible and variable as we will be able to modulate how we invest in tools capacity to match our demand outlook. From a business performance standpoint, we are targeting to achieve positive EBITDA exiting fiscal year 2025 and operating cash flow breakeven shortly after that. Given that outlook and the number of liquidity options at our disposal, we expect to maintain a minimum cash balance greater than $1 billion for the foreseeable future, and we will continue to evaluate that need as we complete our US facility expansion plan and transition to positive EBITDA and operating cash flow. Looking ahead, we believe the current US capacity expansions can generate approximately $3 billion in annual revenue with greater than 40% EBITDA margins. We remain confident in our long-range financial targets as the underlying economics we are seeing so far from Mohawk Valley and Building 10 demonstrate that our purpose-built vertically integrated greenfield approach to capacity expansion will generate strong revenue and profitability. In combination with The JP, Mohawk Valley will be able to produce more than $2 billion of device revenue in addition to the $400 million of device capacity currently installed in our Durham device fab. In addition, with The JP online, we have the potential to grow the material substrate business to greater than $600 million. Lastly, short-term revenue and gross margins are being impacted by slower industrial and energy markets. In the short term, we are pivoting our available capacity to EV products where EV product demand continues to outstrip our available capacity to serve that demand. The outcome of this will be more muted revenue growth and low gross margin for the next few quarters, but as Gregg mentioned earlier, it positions us for any potential recovery in I&E. Most importantly, it does not impact our longer-term plans to achieve our revenue and EBITDA targets. We believe that it will be at least the second half of this calendar year before we see inventory levels return to normal. But as we said last quarter, much of the product we had already produced and slated to ship has a match elsewhere in our pipeline and we are continuing to work to find the best match for that inventory now. I would now like to shift to our quarterly performance. As a reminder, before we discuss Q3 performance, all results reported today will be in a continuing operations basis and exclude the impact of our divested RF business in our results. We generated $201 million of revenue for the quarter, a decline of 4% sequentially and an increase of 4% year-over-year. We generated power revenue of $102 million. These results were largely driven by the $28 million of revenue contribution from Mohawk Valley and offset by persistent weakness in our industrial and energy markets, particularly across Asia. We continue to see growth from our EV customers as EV device revenue increased approximately 48% year-over-year. As I mentioned earlier, we posted materials revenue of $99 million, our second highest quarter ever. This strong performance was driven by better-than-expected yields and output on 150 millimeter wafers. Non-GAAP gross margin in the third quarter was 15%. As I mentioned previously, unit costs at Mohawk Valley continued to improve, driven by increasing yields and lower cycle times as we ramp the fab. However, in the short term, as demand shifts away from I&E, we will see an impact on revenue and gross margin. We will shift as much production capacity as possible to EV products in the near term with the same underlying production will not generate the equivalent revenue or gross margin results. We anticipate this to be the case until we start to see a recovery in I&E markets in the first half of calendar year 2025. This does not, however, change our view that I&E products will be a substantial and important part of our product portfolio and capacity investment over the longer term. Our adjusted EPS of negative $0.62 was just above the midpoint of our guidance. Our EPS, in addition to the underutilization costs mentioned above, also included the impact of $14.4 million of factory start-up costs related to the construction of The JP and our materials expansion efforts. Now on to our balance sheet. We ended the quarter with over $2.5 billion of cash and liquidity on hand to support our facility ramps and growth plans. DSO was 36 days while inventory on hand was 213 days. Free cash flow during the quarter was negative $616 million, comprised of negative $136 million of operating cash flow and $480 million of capital expenditures. Moving on to our guidance, in the fourth quarter of fiscal 2024, we expect revenue from continuing operations of $185 million to $215 million. To give a bit more of a specific breakdown on our revenue expectations for the fourth quarter, we expect materials to be approximately $90 million to $95 million consistent with our prior outlook. Mohawk Valley to contribute $40 million to $50 million of revenue in the quarter, up more than 60% from the prior quarter at the midpoint and revenue contribution from power devices in our Durham fab to be down to approximately $55 million to $70 million, down from $106 million in the prior year period. Also embedded in our guidance is a significant shift of our product mix in Durham from I&E to EV, as I mentioned earlier. As Gregg mentioned earlier, we had a strong quarter in Mohawk Valley and we have a clear trajectory towards 20% utilization at Mohawk Valley by the fiscal year end. However, as we stated previously, that does not entail a 20% revenue contribution in the June quarter due to the time needed to run through our full production cycle. We expect non-GAAP gross margins of 8% to 16% with a midpoint of 12%. At the midpoint, this includes $29 million or 1,450 basis points of underutilization. We expect non-GAAP operating expenses of approximately $119 million inclusive of $20 million of startup costs related to The JP. As a reminder, as Mohawk Valley fab utilization increases and The JP starts to come online, we will start to see incrementally less underutilization, but incrementally more startup costs which hit different lines of our P&L. The net non-operating expenses will be roughly $34 million for the fourth quarter, and as a result, we expect non-GAAP net loss between $109 million and $91 million. Before I turn it back to Gregg for closing comments, I'd like to highlight again that our plan to be a leading provider of silicon carbide solutions to the market is on track and gaining velocity. We believe this because long-term demand remains robust. Operating execution is improving. Our balance sheet remains strong supported by a multifaceted financing plan and we expect to maintain a cash position of greater than $1 billion. The US capacity expansion can generate strong financial returns and pivoting to more EV device production now positions the company for future I&E recovery. Gregg, I'll hand it back over to you.

Thanks, Neill. As we continue to pioneer 200 millimeter silicon carbide and embark on our capacity expansion plan, we maintain conviction in our strategy. Progress is never a straight line and we've said that there will be peaks and valleys, sometimes at the same time in different areas of our business exactly like we are seeing today. That said, the numbers demonstrate progress on execution, but of course there is more work to be done. I'm proud that our team has continued to execute well in an environment where many of our analog peers are seeing substantial, sequential and year-over-year declines in revenue. Forward-looking indicators point to continued outperformance as corroborated by our strong design-ins, which reaffirms our market-leading position and the strong demand for Wolfspeed's silicon carbide products. Mohawk Valley will be the flywheel of growth for Wolfspeed and that ramp is underway. The continued progress of the Mohawk Valley and JP ramps will position us ahead of our competition by further enhancing our lead as the world's only pure play, fully vertically integrated 200 millimeter silicon carbide company at scale. From a macro standpoint, our view of long-term demand is unwavering, despite short-term noise. The transition from the internal combustion engine to EVs is the most disruptive change in the history of the automobile and it will be a bumpy and turbulent transition for the traditional OEMs as well as the new EV entrants. But the transition from internal combustion to EV will continue. Nowhere is this more apparent than in China. I recently visited some of our customers in China as well as many new car showrooms and it is very clear to me that the Chinese OEMs are using this transition to try to become the dominant player in the EV market. Based on my personal observation of the quality of the vehicles and the innovative approaches they are using with their new models, this is a legitimate threat that the traditional OEMs need to navigate. The EV sector has recognized the profound impact silicon carbide can have in making cars more energy efficient. It helps reduce the system size, reduce energy consumption and drive an overall system savings when compared to traditional silicon. Using silicon carbide increases the range and decreases the charge time for EVs. It is now the standard for new EV models coming to the market. As the world electrifies on the existing power grid, other industries are starting to recognize the need for greater energy efficiency as well. This trend is reflected in many of the design-ins we have secured in the last few years for applications including wireless EV charging, energy storage, cryptocurrency mining, AI servers, and heavy-duty mining equipment. Despite the short-term correction in the I&E market, the future holds vast potential. We currently have more than $4.7 billion of design-ins for the industrial and energy applications, representing more than 6,000 opportunities ramping in the next several years. We see even further potential coming from industrial segments as the electrification of all things continues across the broad set of applications, and as such are undeterred by the short-term fluctuations in demand. I understand that our story has many moving pieces as we continue to ramp our capacity and fund our future. We believe our current stock price does not reflect the true value of the company and we are working very hard to change that. I believe this is possible for the following reasons. First, Mohawk Valley is producing high-quality devices and Building 10 is producing high volumes of 200 millimeter automotive grade wafers and we are on track to hit the 20% wafer start utilization goal by June. Our die cost out of Mohawk Valley are better than the equivalent dies being produced out of Durham and we are at a very high yield for automotive grade MOSFET substrates on our 200 millimeter silicon carbide wafers. Next, we are almost past the peak capital investment period for the business. At the same time, we expect to secure government funding and tax incentives that will allow us to complete the construction of the world's largest 200 millimeter silicon carbide capacity footprint. We continue to optimize our capital structure going forward with a keen focus on delivering outsized returns for our investors. Finally, our value proposition is the strongest it's ever been since I joined the company seven years ago. We are the first company in the world to produce 200 millimeter silicon carbide wafers and devices from those substrates. We have more than $25 billion of design-ins and we are the world's largest supplier of silicon carbide materials to the market. Leading the silicon carbide revolution is a formidable task, but at Wolfspeed, we tackle it with focus and intent. We are executing, making good progress and are well on our way to achieving the targets that we previously communicated. Thank you for your continued support of Wolfspeed. Operator, we're now ready to open up for Q&A.

Thank you. Our first question comes from George Gianarikas of Canaccord Genuity. Your line is open. Please go ahead.

Hi, good afternoon, and thank you for taking my question. I have a broader inquiry. There is considerable concern in the market regarding China, especially in terms of materials and devices, particularly as their capacity seems to be increasing rapidly. Can you provide some context on this? How concerned are you about their materials and devices? Have you noticed any effects so far? Additionally, how can we assure ourselves that there won't be a significant impact on profitability in the coming years? Thank you.

Thanks, George. There are a couple of points I want to touch on regarding substrates. The situation is rather mixed. There's a lot of talk about them lagging in providing high-quality, automotive-grade substrates. They are certainly investing in this area, and while they seem to be making some progress with 150 millimeter substrates, the 200 millimeter advancements appear to be much further away. It's challenging to assess the situation accurately given the amount of speculation. During my recent trip to China, I noticed that the confidence in securing a reliable supply of high-quality, high-volume substrates was not very strong. We did, however, extend two supply agreements with long-standing customers for 150 millimeter wafers and substrates, with each agreement lasting an additional five years. This could indicate a lack of strong conviction in that market segment. While we recognize the ongoing investments, it appears that the Chinese are still quite a ways from catching up in terms of both the quality and quantity of automotive-grade substrates. In terms of devices, they seem to be even further behind.

Thank you. Our next question comes from Brian Lee of Goldman Sachs. Please go ahead.

Hello, everyone. Good afternoon. I appreciate your questions. To follow up on George's inquiry regarding the device side, Gregg, could you share your insights on the current market share trends? It appears that there has been some activity and comments from your competitors in the device market. Are you experiencing any impact on market share due to challenges in meeting short-term supply demands? Additionally, could you provide your perspective on what you are hearing from customers? Separately, regarding the forecast for Durham device revenue, which has been a challenge in recent quarters, to what extent is your outlook for Durham still influenced by I&E? Do you think it has reached its lowest point, or are there still potential headwinds from that market? If so, what timeline do you anticipate for recovery? Thank you, everyone.

Thanks. Thanks for the question, Brian. I'll take the first one, maybe Neill can tackle the second one. You know, we just posted our second highest design-in in our history of $2.8 billion, 80% of which is for EVs. So I think that's obviously a pretty good sign of continued progress. At the midpoint of our guidance for our automotive or EV business, we're going to be up, I think, on the order of 48% year-on-year. And also at the midpoint of the guidance for EVs, our EV business will have doubled since the beginning of this year. So I think if I'm unaware of anybody that's growing 100% through the year, so I don't see how there's a commentary about losing share. And then you put that on top of having the second highest design-in in our history, it doesn't quite square the circle.

Yes, regarding the I&E and Durham fab perspective, I agree with you. We've noticed some additional weakness in that area. We've previously mentioned that we expect revenue from Durham to fall to around $60 million to $65 million, mainly from I&E, and we anticipate seeing that level for the next couple of quarters. It does seem like we've hit a bottom. It's also important to note that the transition from I&E to automotive is not just a simple margin mix change. When we move to automotive, we're dealing with more complex and larger die in the factory, which requires more steps in the manufacturing process. Therefore, the trade-off isn't straightforward. We will manage this situation and supply our customers where there is demand, particularly in the EV market. We plan to shift more of our volume to EV applications, focusing on the Durham fab. I expect the revenue will remain in the $60 million to $65 million range for the next couple of quarters after December. As I&E recovers, likely around March to June next year, we will be prepared to respond to that increase.

Our next question comes from Samik Chatterjee of JPMorgan. Your line is open.

Hi. Good afternoon. Thank you for the question. This is Joe Cardoso on behalf of Samik. I wanted to follow up regarding the design-in and wins conversation. Could you elaborate on the conversion rate you're experiencing from design-in to win, particularly given the decline in design-wins this quarter, even though design-ins are in line with recent trends? How should investors view this slowdown in relation to the patterns observed over the last two quarters, especially concerning design-wins? Thank you.

We feel very confident about the conversion process. It's important to note that design-ins and design-wins do not always occur at the same time. For instance, in the case of an electric vehicle application, some companies may incorporate designs as early as four years prior to production. We recognize a design as a win when we start ramping up initial production. In this quarter, we recorded around $2.8 billion in design-ins, with about 80% attributed to EV applications, achieving our second-highest total ever, bringing our fiscal 2024 design-ins to over $7 billion. We are pleased to report approximately $870 million in design-wins for the third quarter. These design-wins typically develop over the next five to seven years, providing significant revenue visibility for the future. Our design-wins now support over 125 car models across more than 30 OEMs for the next three to five years. As we advance our ambitious expansion efforts and deliver high-quality silicon carbide materials and devices to a largely untapped market, we remain confident in our strategy. Our strong design-in and design-win trends this year, despite the current fluctuations in the EV market, reassure us about the future and sustainability of silicon carbide. We are eager to maintain our momentum, particularly at Mohawk Valley, through the end of fiscal 2024 and beyond.

Our next question comes from Jed Dorsheimer of William Blair. Please go ahead.

Hi. Thanks. I have a couple of questions. First, could you help clarify the unit economics? Looking at the materials business with revenue between $90 million and $95 million and applying a 40% margin, I calculate a midpoint of $24 million from the 12% on the 200, plus $29 million from underutilization, which totals $53 million. This suggests that even if Durham contributes nothing, Mohawk Valley would only generate $13 million, resulting in a 29% gross margin. Can you point out where my calculations might be off? Is Durham negatively impacting gross profit dollars, or is there something else I’m missing?

Yeah, Jed, I think you're kind of breaking this down in a way that I think it's a little more nuanced than that. As I talked about before, when you move to the bigger die and transition things over to automotive, it becomes a bit more challenging from a manufacturing standpoint. So we're kind of going through a manufacturing transition right now to go from I&E products to automotive products. It will smooth itself out, I think, as we work through the next couple of quarters. But clearly we are seeing that with the same product running out of Mohawk Valley, we are seeing better cost performance and clearly the average transition to same part, same customer that translates into better profitability obviously, if you think about that transition over to Mohawk Valley.

Okay, so it's non-optimized then I guess would be the big margin.

Not yet. I think in Durham that over the longer term, it doesn't really change our view on how things look. This is really just a short-term issue, a couple of quarters type of challenge. Over time, we are confident in our ability to drive the business up to over 50% gross margin. Consider a 70-30 mix; electric vehicle products can be significant, while industrial and energy products during this period will be optimizing the factory to serve customers. Once we are prepared to shift back, we will be able to respond swiftly. From that perspective, we have the ability to transition the business and move products around based on end market demand. Additionally, the unit cost economics in Mohawk Valley are currently very positive for us, even at early stages, and we expect that to accelerate over time.

Our next question comes from Joshua Buchalter of TD Cowen. Your line is open.

Hi, guys, thank you for taking my question. I was hoping you could maybe expand a little bit more on the change in tone around expansion in the Saarland facility? Is this primarily a reaction to what you think is better for the stock right now or was there a change in the sort of the long-term outlook? It doesn't seem like the latter given you mentioned sort of perpetual supply constraints and confidence in EV demand. But it would be helpful to hear some more input on what's driving the change in CapEx. Thank you.

I'll allow Neill to provide some additional details after my introduction. Our goal today is to clearly outline our current focus. Over the past few quarters, I've emphasized our commitment to the ramp-up in Mohawk Valley. This involves getting Building 10 operational and completing the construction of JP. These three projects are our primary focus at the moment. Mohawk Valley has met all the milestones we've discussed and is on track to reach 20% utilization this quarter. Building 10 has been very successful, and we are confident in achieving 25% utilization in Mohawk Valley from Building 10 and our Durham campus infrastructure. The JP project is on schedule, and furnace installations are underway. As noted, the campus is being energized and connected to the grid, and we will begin qualifying those furnaces later this year. We are highly confident, as The JP site is located about 40 to 45 minutes from our current location. The same team that successfully developed Building 10, which was initially a recreational facility, is also responsible for bringing up The JP. We are very optimistic about this. We want to clarify that this is our focus, and we will maintain that focus until we achieve the success we know our facilities can deliver.

And then from a CapEx perspective, I think there's really no change to what we've been saying I think for quite some time. We always kind of thought 2024 would be a peak CapEx period. We're going to see CapEx come down in 2025 pretty substantially. We talked about bringing that down to $600 million to $800 million. And that's before including any potential government incentives that could come in at that time frame. And the reason for that is The JP will be largely complete from a facility perspective as you finish this calendar year. That's been the majority of our CapEx spend in 2024. As you get out of this calendar year and start looking into calendar '25, like very much a tools based spend. So installing tools in both JP and Mohawk Valley and we'll just continue to modulate our CapEx to match that with that market demand. So that's really where we're focused right now. As it relates to another facility after that, I said it very clearly on the prepared remarks. We'll wait until we see that performance Gregg talked about in addition to having good cash flow and operating performance that can support and what we would do next. That's really the plan that we've laid out and that's what we're going to continue to focus on.

Our next question comes from Colin Rusch of Oppenheimer. Your line is open. Please go ahead.

Thanks so much. Given the design activity and a lot of the cost reduction activity that we're seeing with the EV makers, can you talk about what you're seeing from a voltage perspective on power train designs? Are you seeing a steady migration towards 800 volts? Are you seeing kind of a retrace back to 400 volts or some sort of middle ground or any activity around even higher voltages than 800?

No, there's certainly not a retrenching back to 400. I think folks have realized that you get much better efficiency, better charging and so forth at the 800 and even higher voltage bus on the EVs that requires an even higher voltage, call it 1,200 volts MOSFET. So no retrenching back to that. I'm not the expert on what's next beyond 800 volts, but I would say they're really switching from 400 to 800 is not going backwards.

Okay. That's super helpful. And then on the supply chain side, obviously, there's been a lot of rebalancing around inputs into various processes. Can you talk a little bit about the opportunity for kind of fundamental cost reduction on the manufacturing side from a supply chain perspective?

Yeah, let me address that and perhaps Neill can provide more details. We are in the early stages of ramping up a new wafer diameter and a new wafer fabrication facility. We're already seeing significant improvements in the quality of our 200 millimeter wafers, particularly with the percentage that meet automotive grade standards, which is nearly all of them. We're very pleased with this progress. We're also focused on increasing the number of wafer cuts per boule and improving yields in the fab. Despite already having lower die costs in Mohawk Valley compared to Durham, I believe we are just beginning to see cost reductions for our 200 millimeter production.

Let me add to that. I believe we are in the early stages of the opportunity to reduce costs. The initial results on yield and cycle times we are seeing in the fab reinforce this. There's also a structural aspect to the business we are developing. If you examine the cash margins or our EBITDA target of around 40% over time, our current business will see approximately $185 million in depreciation this year, which is about 20% to 25% of our revenue. Once we bring The JP online next year, this could increase to around 30%, even at this early stage of growth. This signifies that a significant portion of our costs, 20% to 25%, is non-cash. Thus, we see a strong cash opportunity from a margin perspective as we scale the business. As we enhance yields and cycle times and expand our facilities, this business is poised to generate substantial cash flow. It’s about maintaining our focus on yield and cycle times, meeting customer needs, and fundamentally building a business that generates significant cash flow.

Our next question comes from Jack Egan of Charter Equity Research. Please go ahead.

Hey, guys, thanks for taking my question. So, Gregg, I just had a quick clarification for you on one of your earlier comments. So I think you mentioned that Chinese devices are probably further off than materials, but as we generally understand it from a, I guess, a science and an R&D point of view, materials are generally a lot harder to develop and ramp than devices. So, I mean, why would China be further behind in devices even if they're relatively easier to ramp than the material side?

Yeah. So thanks for the question, Jack. This is just the input that I got from the customers out of China. I know there's a lot of effort going into trying to develop a silicon carbide crystal growth capability. As I mentioned, it's hard to get through all the noise on this thing, but likely they're making progress on 150. And what we hear is they're pretty far behind that 200. So and then from a device perspective, a silicon carbide MOSFET is also not a super easy thing to do as well. And I think there is – to be honest, it feels like there's less focus on that at this point.

The next question is a follow-up from Jed Dorsheimer of William Blair. Your line is open.

Hi, thanks. I just want to dig into, Gregg, your comments on demand, which seem strong for you in EV. Just in the materials business, with that business coming down so much, so if I kind of take your guide on a quarterly basis, it's come down about $40 million per quarter. Why aren't materials ramping consummate to that? Because I would assume that opens up the 150 millimeter wafers to sell to other customers.

Sorry, Jed. So in terms of how we think about that. Right now, the end market demand for automotive in terms of EV customers, there's a lot of changes that Gregg talked about in terms of the OEM landscape. The amount of demand still outstrips our supply. So it's really important for us to continue to take as much capacity as we can serve those customers. In the meantime, we'll continue to drive our materials business. As you know, we've got a lot of long-term agreements there that underpin our revenue for a long time. And I think that the $90 million to $95 million per quarter will continue to service that market, I think, in terms of how it's kind of laid out today. I think it's very important that we continue to service our automotive customers this time and we're going to continue to operate.

Well, I understand that. Neill, maybe I didn't ask the question as clearly, but if $40 million coming out of Durham on the devices side where you're supplying the 150 millimeter wafers internally, why wouldn't you be able to see a $12 million increase in the materials business?

Yeah. So maybe I'll take a crack at that. I don't think I understood that to be your question. So a couple of things. Obviously, we have automotive demand that is higher than our current supply. So transitioning that capability from I&E to automotive is a very important customer satisfaction item that we're focused on. The automotive devices are larger than the industrial products and substantially most of the industrial products are sold in packaged or module form and the exact opposite for automotive. For automotive, substantially most of the product that we sell is in die form. So we're not adding value. We're adding incremental revenue potential for the same amount of, I'll call it, silicon carbide millimeters squared. So it's not a one-to-one trade-off when you move from an industrial part to an automotive part in the fab itself. Is that clear, Jed?

Thank you. We have no further questions in the queue, so I'll turn the call back over to Gregg Lowe for any closing comments.

Well, thanks, everybody, for participating in the call with us and we look forward to catching up at the end of next quarter. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your line.